European stock and bond markets rally as fears ebb

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The gloom over Europe’s financial markets lifted a bit Thursday, helped by encouraging words from the European Central Bank and a well-received bond sale by Spain.

The battered euro has strengthened, topping $1.21 for the first time since Friday, up from $1.199 on Wednesday. The euro hit a four-year low of $1.188 on Monday.

Most European stock markets rose sharply for a second straight day after being pummeled since late April on fear that the continent was headed for a full-blown credit crisis. The Spanish market surged 3.7% after rising 2.3% on Wednesday. German shares rose 1.2% after a 2% gain on Wednesday.

U.S. stocks also are rallying, with the Dow industrials up 203 points, or 2.1%, to 10,101 at about 11:20 a.m. PDT.

In a statement after a regularly scheduled ECB meeting, President Jean-Claude Trichet said the bank still expected the euro-zone economy to post positive real growth this year, though the ECB trimmed its growth forecast for 2011.

At a news conference, Trichet also said the ECB would continue to make unlimited funds available to European banks via short-term loans to combat liquidity concerns.

Trichet refused to provide details about the ECB’s program, launched last month, to buy government bonds of euro-zone nations in an attempt to keep a lid on countries’ borrowing costs. But he pledged that the program would continue, saying it was “appropriate to continue to do what we have decided.”

Separately, Spain was able to sell $4.7 billion of new three-year notes at a yield of 3.32%, allaying fears that investors would be unwilling to help the country refinance its debt load. Market yields on Spanish bonds fell across the board after surging in recent weeks on worries about the country’s ability to pay its debts.

The two-year Spanish note yield fell to 2.73% from 2.88% on Wednesday and the recent peak of 2.92% on Tuesday.

For the moment, Europe no longer is in meltdown mode.

-- Tom Petruno